question to the audience, since i believe an audience participation. the question is what is people's perception about how often we have a financial crisis in anyplace in the world. does someone want to say whether we have one every ten years, every 20 years or let's look at it this way, since world war ii how many financial crises do you think we have had across the world? what you think? >> every ten years. >> does anyone think that it's more frequent or less frequent? yes, miss? >> more. >> more frequent. okay. let's look at some of the numbers here. the left side we have professor i can green from he's a broad definition of the crisis and includes essentially any crisis whether it be debt crisis or banking crisis in any country in
the world and what you can see are two things. one is there are a lot of crises and second of all the frequency of the crisis is accelerated and the reason why it is accelerating this because of globalization, and therefore these markets are much more correlated, there's low-cost information and so crisis can easily build across the world. on the right side of the screen are ken, she has a narrow definition singing major banking crisis, so we are taking all sovereign people, major banking crisis in advanced industrial countries, so he's taking out all latin american issues etc.. but even under his numbers, you see we have 22 in that span so with the nearest definition we have financial crisis roughly once every 2.3 years so it is clear to me that over the next
ten to 12 years we are all going to experience at least two major financial crises. we don't know where it's going to be unless we do something in terms of regulatory reform and financial reform this is pretty much coming down the road. now, just since sarah has given me a total of eight minutes, going to give four main themes. the first is what is this concept too big to fail. we have a certain number of institutions that we say are too big to fail and i think that we would have a consensus that institutions like fannie mae and freddie mac were in that category. but here the question is how many financial institutions do you think that the treasury has put capital into? on defining the bailout that the treasury is putting government capital into how many in the last 14 months to you think that
we have had? can i have a show of hands? yes, how many? for? how many, sir. 600? the number turns out to be 690. 690, that is the number of institutions which the treasury has recapitalized. whatever your theory is of two big to fail, i doubt that it comes up to 600 or 690. so we clearly have a situation where we are basically allowing anyone to yell in a crowded room systemic risk and we give them money and it's my view that we need to develop an article that rationale, limited rationale and much more disciplined process by which we decide when and where we are going to be allowed institutions and also have some system of accountability. right now over the weekend something happens lots of people get bailed out so that is one of the major themes of my book and one of the things i think are
really important to the financial reform. okay. a second theme is boards of directors. i think many people are wondering how involved is the federal government going to become with things like executive. we obviously have kenneth feinberg and improving financial particular institutions, and we have the fed now taking the view they are going to look to see to approve or disapprove whether it is risky or not and essentially 8,000 institutions. one of the things the fed would say is the board's job the wall. why are we doing this and not the board? this is what they're supposed to do, said and design compensation and improve it. what's interesting is as many of you know in 2002 after enron you had sarbanes-oxley, you have requirements that most of the
directors be independent and they follow a elaborate procedures to be the interesting thing is if you look at a board like citigroup they did all of that. they were mainly independent directors and they followed all of the sarbanes-oxley procedures and they don't seem to have had a very good sense of how risky the institution of plus or what was happening. when we look we can see three things. but i believe account for that unit one is these are very large ports. citigroup was usually about 17 or 18 people. when you have that larger board of the psychologists will tell you there is a lot of avoidance of personal responsibility. second is surprisingly most of the board's of these mega banks had very few financial sophisticated institutions people. citigroup there was only one person who ever worked for a financial restitution on the
board and they were distinguished people but they did not have a high degree of financial expertise. of the third thing is they would meet one day every other month and the question is six days a month, six days a year can you possibly understand an institution like citigroup. one of my proposals or let's have small awards and people who are experts and basically that's have a professional group of directors. that's the main thing they do. if we want to hold management accountable we have to have a board of directors who spends more time and knows better what is happening. that's not what we have now. at least for those 20 institutions that have more than 100 billion in assets that's what i call mega banks. third point is we see various political bringing in banks and beating them up and say why aren't you loaning more? we've given you more money how come you're not learning more?
in 2006 before the financial crisis, banks accounted for what percentage of total credit extended? to somebody want to say what percentage? how many people think it was 50%? how many think it was more than 50%? how many people think it was only 20%? it turns out it was 22%. the banks only accounted for 22% of the credit extended in that year and the majority of credit and the u.s. is provided by non-bank lenders, credit card companies, although finance companies, mortgage brokers and they depend very heavily on loan securitization. in 2006 week as a country securitized roughly 1.2 trillion in loans. this year and last year we are running at about 30 or 40 million triet loan securitization is what drives loan volume that gives the ability of the originators to
sell it to the secondary market and have it packaged in that means to have money to make more. we have a total breakdown and securitizations. we need to fix that if we are going to get the volume going and loan volume is critical in my view for economic recovery. we can beat up on the banks all we want we are not going to get a lot more loans unless we six loan securitization. last point, there are lots of bills as cirrus is before congress the house has a bill and now the senate has a series of bills and i believe there will be financial reform this year. there are lots of things we can say about this but i think probably from my mind if you highest priority is where there have been the biggest gaps in the first area is financial derivatives. in 1999 and in 2000 there was
expressed decision by the administration and congress to exempt all of these basically from the commodities and the sec. this turned out to be a very bad decision in 1999 there were about $1 trillion in credit to be felt swaps. by 2006 there were 60 trillion this is essentially not regulated. this needs to be supervised. you can debate, clearly letting that sort of the market develop unsupervised was too much. hedge funds again very aggressive, very huge increase in assets essentially unregulated. global insurers as we saw from aig you have four or five large insurers in the u.s. the are regulated by 50 states. there is no federal regulator. very hard to come to grips with those and systemic risk. you can argue what we mean by systemic risk but clearly the whole system, the regulatory
system was geared to look at particular institutions and a narrow focus and people were not looking at overall systemic risk. i think these are the themes we need to talk about and i going to end in there and open up to more discussions. thank you very much. [applause] >> one of the things particularly notable about the book is that in contrast to the high level there is in each of the chapters a very accessible and well-informed but still simple description of the issue where the problems emerged and i think unique in the panoply of crisis post/rocky analyses prescriptions. the book probably i think at one point i counted we were up over
142 recommendations are something of that sort, so obviously bald didn't have the chance to go through all of them >> juan [laughter] >> other important trivial data. >> i encourage people to take a look. there is enough for people to agree with large portions and plenty as well. with that i wanted to ask you at the level of the framework do you have general faults and reactions to the presentation and the book? >> first off i would say we are in a society now where the notion of the too big to fail is synonymous with on a fair and the notion of expertise whereby you are to defer to the experts because finance is complicated use let's say the process is sputtering. people do not have trustor faith in the experts given the had
little to say about prescription reef inadequate diagnosis and i think that poses a great teacher because in this book which is very readable and lucid he has built a bridge so that we can go through the window and participate in the diagnosis participate in exploring different possibilities for repairing the forum and understand better what happens and i think elving would you might call repairing the heart of the population and allowing them to engage is an important part of the ritual of bringing the society back to the place of consensus. >> one of the things i think both as i talked to before have focused on and rob start with this, that the book talks about what the rules and future ought to be you do have prescriptions
about how we might change who the regulators are but a in the sort of spectrum between radical change from the status quo and leave the boxes as they are and change authorities i would put you more closer to the administration's proposal and house bill not as much radical change. do you want to start by talking what you think the goals, but the ground fools and then why committee began talk about why it matters. >> first of all as i mentioned the of eyesore for the society is the notion of too big to fail so the question or the challenge becomes how do we eliminate the possibility that in jamie dimond, chair of of jpmorgan is suggesting there is no place for too big to fail in our society. as a presold, one has to have
credible mechanisms for resolving financial institutions. i break into three parts. the first of which we might call deterrence. what rules or policies can we put in place like delusion of stock, firing of management, mandatory restructuring of the creditors in the yves saint of the insolvent institution which would show people ahead of time they will pay a price somewhat unlike the experience. second is the matter of detection to credibly detect when the institution becomes insolvent you have to be able to measure what's on the balance sheet in particular regulators have to be able to measure so the complex and opaque instruments typically complex data tips that were at the core of the last crisis have to be simplified and in particular
think the drive this market reforms as rob pointed out in the regulatory gaps are vital because on till you can measure what assets -- we are not talking about a fictitious scientists, we are talking about actual transactions. until you can measure that you can't measure the value of assets and you can't measure capital and if you don't build capital you have you don't know if you are solvent or insolvent so you have got to be able to detect the insolvency when it arises. finally with regard to the resolution many proposals focus on the question of one isolated institution in trouble that i think we have seen in in this experience we had a whole constellation, large oligopoly of institutions in trouble together with the danger each could cascade into another and
amplified the disturbance. many people who are officials say how can be credibly result the institution, how can the treasury's eckert to come up in the morning with fees' newfound resolution policies that are in the house bill and actually close an institution? i would argue that that individual was responsible to society not to allow spillover to the economy has to be able to come on deck and assess the spider web of interconnections between the firms and the individual has to also, and this is in dimension perhaps bob would like to discuss because it is mentioned in his book we have to have an international regime. the firms of international reform. if you were going to do the burden sharing and restructuring in order to restructure the firm you've got people to share the burden of around the world
because there are creditors in different jurisdictions, switzerland, london and what have you. what i am concerned about in the current legislation is without adequate to affix reform and i do not believe what is on the table was adequate, things will be opaque, things will be complex and officials will be detoured, they will be induced into continued forbearance which like we saw with bank of america and citicorp in the spring of 2009. rather than take forceful restructuring. we won't be able to detect the time at which we want to do this and we want people to handle things internationally. i think a portion of what must be mandated by whatever when you look at them, regulatory authority is international agreements akin to the kind of agreements you have for the world trade organization for free trade. there's no saying there's a will there's a way. multinational corporations want free trade agreement and that
encroaches upon the sovereignty of the nations in the name of free trade. we can encroach upon the sovereignty of many nations to create harmonized bankruptcy regime so that no country has to indoor the forbearance in too big to fail firms we bailed out over and over again. >> start with the beebee international and go to discretion and a few other topics. >> rot has missed so many points let me talk about three deterrents monitoring resolution and then about the bureaucracy issue first is the functional issue. i agree on of the keys is deterrence and i think the most important determinants is to have higher capital requirements and differently designed capital requirements. i think there is a consensus that we should have higher capital requirements. people don't realize how badly designed the capitol requirements are.
we had won international agreement and people spend 20 years and also and came up with fossil one that said the capitol requirements for the bank if you have normal loans come standard loans is 8%. but if you have mortgage loans that only 4% and mortgage-backed securities that are rated aa its 2% so we had a system of capital that didn't recognize differences between subprime mortgages so it's probably true that international agreement is an important factor causing the crisis because it skewed the incentives. now we are on something called fossil to. every large bank can set its own capital requirements and sets them by doing their own risk analysis with these risk models then it goes through an
elaborate set of formulas. all i have come to be i would say basically opposed to the risk models. if you have overseen then you can't understand them. you don't have a ph.d. from mit and matthew got no chance. i doubt whether there is a director in any bank that understands these risk models but we know one thing about them, they were wrong. all these geniuses were wrong because they made assumptions like once every 100 years housing prices will go down in the u.s.. if you make that assumption and put it through for meal less it looks pretty good. the question is the assumption reasonable and i don't think it is. the basic idea of these risk models, and i critique this in chapter four of my book is that there is a normal distribution curve and it looks that mice bell curve. the reality is in many financial market is not a normal
distribution turf so this idea of modeling in having the capitol requirements based on that just seems to me a big mistake. now, in terms of monitoring i agree with what robb says about the celebrations. i think it is unfortunate we had a system, we do have a system of fair value accounting. i would say there has been huge political backlash. i didn't see anybody complaining when people were marking up assets but when they started marking them down i saw a lot of complaining. there are some legitimate questions about illiquid assets and i think that it's been pretty responsive sitting of certain exceptions. there is a move in congress which was expressed in part of the house bill to actually overthrow the fcc as accounting decision makers and with that go to some banking counselor and i think about the terrible thing
because we have two different groups, we have investors who want to see and regulators who should want to see on a regular basis what's the valuation. that doesn't mean just because you've market differently you have to say okay for banking group to assist you are insolvent. that is a different question but if we start giving everyone so many exceptions we can't tell what these things are valued at i think we've made a terrible mistake. now, just to go to the shakira critics i think some bureaucratic issues are important and others are not. if you took accounting standards out of the fcc and took them to the banking agencies you would have a system that was much more geared to protecting bank solvency than expending to investors and i think that would be bad. that is well known detention
however i'm a little cynical about, you know, a process that led us to the homeland security department and senator dodd has this proposal to take all four banking agencies and merge them into one. those four banking agencies actually do joint rule making so all of the rules are pretty much the same and there's a little difference in implementation but it would take a huge amount of political effort to consolidate those agencies and my concern is that would divert from the sort of the goals that robb is talking about. people spend a huge amount of time arguing about that and that's what really worries me. so i think we should be careful not to spend limited political capital we have on your critics unless they are important to achieve the functional goals and i don't think absolute matter whether we have to cut three, four banking agencies. we have for now and if we had three or two or seven i'm not
sure it would make headachy difference so i guess i hope we are not going to get diverted in that way. >> one thing i think from where there is a place of agreement on the urbanization and i know this is in the book is you are supportive of the idea creating a consumer financial protection agency although i think in the book you limit to mortgages, and i don't know what your thoughts are on that. i think your microphone and not be working perfectly. wanted to just generally ask you about the notion of the bank regulators whose primary purpose is to think about the solvency of these institutions and protecting the depositors in those institutions whether they are likely to be successful in doing the consumer protection functions and whether there is a benefits in taking those responsibilities and bringing them together and i want to ask
you a little but also about systemic risk but let's to the consumer issues first. >> i hope you can hear me, i sort of taking a middle ground position. unfortunately, the original proposal for the consumer protection agency was so broad it included every financial instrument in the world pretty much and i was a very concerned would have a lot of overlapping jurisdiction, a lot of conflict. for instance eight covered deposits. it covers savings programs. the banking agencies are going into the banks and presumably looking in deposits and they ought to look at them in connection with assets so i couldn't understand why we want to be that broad. i fink on the other hand there are certain areas, mortgages is a good example where we have seen the agencies haven't been a very good job and we have thrown
a lot to the states we put in the state licensing of mortgage brokers and i guess i'm very concerned about not having a strong federal agencies and mortgage origination. i would also say it's not just mortgage origination, for payday loans, lots of things in which we have mainly nonbank lenders and even where we have the nonbank lenders that should be in the consumer agency and in products we feel the banking agencies are not doing a good job i think probably the most controversial area is credit cards because we have not made all of the credit card national bank's we believe and i think rightly so there should be one national regime and we shouldn't have lots of states interfering and if we are -- we have to have one group set eight. as you know in the house bill in the end of the compromise was the consumer protection agency sets rules for credit cards but they are not allowed to examine
i think 8,000 of the 200 banks so i'm not sure this is a sensible compromise because i would like to see the people who set the rules have responsibility for enforcing them. so i think that it was unfortunate that it started so broad. and so what's happened is it's gotten pared back. i notice for instance ogle financing was taken out which is a mistake because that is a non-bank lender where we really don't have people involved from the federal banking agencies. so we need a set of principles and my principles are its concentrate on the nonbank lenders and let's concentrate on lending facilities which go to low-income people and let's try to minimize overlap between the banking agencies and this agency. >> i want to take this up about 10,000 feet which is we have a society that particularly since the time of ronald reagan tends
to think the government is the problem rather than the solution. prior to that is the keynesian era people felt the government was the solution and the market was the problem. we are now in a period there is tension nobody believes particularly after watching the bailout's that the government is the solution. nobody's romantic about the ideas either. and in this pragmatic laid we must now address i think we have to affirm their is a social purpose and financial regulation otherwise we will just be chafing at an unconscious higher altitude. we will be chasing about whether things are -- i agree too much overlap and the bill will
scrutiny is costly. on the other hand people will argue that any interference or intrusion or rules is costly and not necessary. i think that we have to move beyond that as a society. the scale and scope of the crisis we just experienced and the frequency that you showed your charts suggest financial markets more than any other with the vicissitudes of how we say the volatility of the fisa tubes of shifting expectations and so forth meat for the domain where the regulation is warranted and with that philosophical agreement as a society than the particulars become less contentious. >> i should make clear that what i'm talking about is when there are two agencies both of which have jurisdiction over the same financial product and that's what my concern is.
i agree there should be someone with federal policy and i'm very concerned that if we leave mortgage brokers to every state through licensing we will get some states that will do a good job and some states that won't. >> some people are concerned with regard to credit cards and of the bank regulators are in charge they are regulating for the banks rather than for the consumers so will i will call the elizabeth warren agenda somewhat broader consumer financial -- >> i've talked to elizabeth who live very much respect and i think maybe these are all national banks now. maybe what we need to do is set up a separate division of the comptroller that's more consumer oriented and let them be the ones who do this because since they are all national banks or the other possibility is to say credit cards have to be organized as a separate bank and
then have one agency of jurisdiction. if you have credit cards as a function within the national bank and there's already the comptroller regulating them and they are mixed with others that is where you get into complications. >> i think in some ways with this conversation has suggested is there is tension between whether multiple agencies regulating the same entity for different purposes inevitably creates confusion and difficulty for the institution. on the other hand there is a question of institution culture and whether or not a given institution which is set up for example to think about safety and soundness will be institution by institution good at systemic risk or that is set up to think about the prudent financial management is going to be good about thinking about consumer protection and i think that sort of functional set of
questions how you balance between the functional questions without creating a kind of bureaucratic nightmare of regulation for the institutions is what is part of the dialogue and there are lots of possible ways you could in the resulting that here. let me ask you briefly each to talk of a systemic risk. the discussion has been about again the box is whether or not the fed should be the systemic risk regulator while it is also a provincial regulator of some of the largest institutions is it beneficial or contrast. how do you think about systemic risk and the role of the federal government and whether it belongs separately or together with the same function. >> first of all i do think that the federal reserve as i mentioned people do not have allowed safe in experts in the federal reserve which is the place where i started my career but as always has had what you might call a very strong reputation has had that reputation tarnished so they
have to earn the confidence of the society, and i think that is an unfortunate byproduct of the crisis whereby the fed was asked to be essentially a back door bailout. federal reserve traditional role is focused on what the tory policy and here they essentially began the fiscal agent of the united states in a way that was what you might call revealing their structure which is not a purely space structure could be seen to use taxpayers' money to favor financial institutions. when you talk to people at the fed or the treasury and others, they say and perhaps rightfully what did you want us to do? sit there and watch while the real economy melted down? you want us to teach a few lessons to speculators and traders and watch the economy
crash and the answer is obviously no. but there are ways to handle systemic risk and there are ways. handling things as the federal reserve system did in the aig bailout where the american taxpayer -- money was used through the conduct of aig to 45 financial institutions some of which are foreign and not under the umbrella of the united states to manage systemic stability was a tremendous abuse of taxpayers' because in the bailout had a bankrupt aig and marked down the exposures to the country's then the american people put up exactly the same amount of money in recapitalizing all of those firms the american people would have owned stock in in this recovery and owned a piece of the firms that are doing well
again. i think the thing that disturbs me most about what people in the regulatory world are saying that the fed particularly if they say to you what did you want us to do? sit and watch the ship go down? they are making the case that the real economy is affected by the spillover from the financial system and that is what systemic risks is. if they are willing to make that case, they have to make the case for strong prior restraint on those financial institutions restricting their activities just like you make the case for restricting polluters from the side effects will be called the externalities' and spillovers affect the quality of environment. when i look the systemic risk debate the fed is defensive and the treasury is defensive about what did happen and we need to
open up what happened at aig not unlike eliot spitzer said at the end of the year we need to open that up and examine and make sure the legislation we are trying to pass and regulatory reforms we are doing actually cure the disease that was revealed by the episode. >> with a comment on a few points. first on aig i absolutely agree it was $62 billion handed out covertly essentially and 40 billion went to them on the u.s. institutions and all of these people had essentially made the mistake. they had chosen the wrong counterparty. these are the most sophisticated financial institutions in the world and they all got 100 cents on the dollar and if we don't make them take any penalty for making a bad judgment about how free risk, then we don't have anything in risk-management and
switch all for naught. the second thing and i actually calculate is in chapter 7 of the book is how much exposure did the fed have? and it turns out the number on believably was $7 trillion. remember congress only appropriated 700 billion. but then with the treasury would do is give 100 billion to the program and then the fed would lend out petroleum and the treasury what sort of act as first loss. this is why the fed reputation is suffering because it is allowed itself to be delivered up by the treasury and get into these programs and so i think that the political pressure that's on the fed now we is really understandable but the fed ought to get back to its role as a monetary authority and if it doesn't get back to it we are going to have more people like ron paul writing books called abolish the fed and that's not a good thing for the
fed. to talk for a brief moment about systemic risk, the real problem is not who is going to do it but what do we mean by systemic risk? it's easy for everyone to say okay now we are going to be focusing on systemic risk what exactly are we going to do? we know that the nature of most bubbles or after the fact very brilliant about it, but during the process we are not so brilliant and some people who look in 2004 bald shiller evansdale who wrote the foreword to my book he said the housing market was out of control. he showed you all the numbers. but you know something people didn't listen and people made money between 2004 and 2006. so i guess i try to say what are the things that have historically played to financial crisis? and if you go through all of the
history there are four things that to me are ones that we should focus on if we are going to look at systemic risk that's likely to become a financial crisis. the first is a real-estate boom especially the bubble that is financed by money from outside the country. that is characteristically leads to a financial crisis sooner or later. it's not just the u.s. to solve it in ireland and spain. second of all, high leverage. the sec made a terrible decision in 2004 to let the 5 billion investment banks go from 50-will leverage to a 30-1 leverage and we paid for that. third, when we have a new product and we have lots of good new products that become very huge very quickly without regulation that is essentially credit-default swaps. and those are three things -- the fourth is a match match
between assets and liabilities. if we have long assets and short liabilities there's a mismatch. that's what happened in the s&l crisis and that is what happened in a lot of these mortgage backed securities. the issue were of the securities at mortgages, 15 year mortgages, for 30 year mortgages and mehdi issued 60 day commercial paper how to beef rolled over and pulled over so that's what makes you vulnerable to the liquidity crisis. i would like to see more discussion about whether these are the right factors, we have more factors than class discussion about what the bureaucrats are going to do about what agency is going to look at this to >> once again with regard to the systemic risk, we are not in a situation where we are resolving one failed financial institution. as we were in the throes of the period of bear stearns or up to the lehman brothers' episode, if you walked into the cso office
of feeney of the nine or ten big money-center institutions, investment banks at the time and ask them are you souls and, first of all with the complexity they may not know it probably didn't, but secondly if you ask them or use of it and they give you an honest answer the honest answer is it depends on the eight other guys and we had a situation which i think calls for something akin to a bank holiday where you closed the mall, measure them all, recapitalize them in parallel and instead what we had was a process after bear stearns with politically strong to get to the back of the bus and then you do bear stearns and wipe out a couple of others and recapitalize others the politically strong and of the bus after it the other seven can look at you and say of course we are solvent. within that happening is there
was a horrible microeconomic violence where the politically strong ticket to the bottom of the boss and the management stock-option and their stockholders are preserved because it sacrificed the people with the front of the bus. what's the problem with that system? the problem of that system is once you identify that you are in a crisis, the politically strong have tremendous incentive to delay resolution so the debt and the duration of the mounting of the crisis and spillover and consequences goes on and on before you have sequentially result everybody because the politically strong can resist being resolved and we need in this efik of governance of the financial system the ability to bring everybody in a parallel, will get them all.
this is not unlike the reconstruction finance corporation did in the 30's or what franklin roosevelt ordered and we need to reassert that society is in charge of financial markets and they are the means to an end rather than a dominant political entity. >> i want to spend just a couple of minutes on housing finance. to spend the first probably 25% of the book on the mortgage markets and securitization process and the gse east, fannie mae and freddie mac and the role they play in the crisis because in many ways they are what started the unraveling said it made sense in the book we haven't gotten into much of that in this discussion so far. here at the center we have comfy and mortgage finance working group and are spending a lot of time thinking about what comes next in the financial system as we try to disentangle the federal role which was essentially supported in 90% of the housing system. we could talk a lot about the diagnosis of how that went but i
want to talk a little bit about particularly the future because you argue we won't have mortgage lending or other kind of lending unless we figure out the securitizations process and in particular to talk to the mismatch between long-term and short-term. 30 fixed rate finance is a core concept in the united states, it's relatively unique. there's only a few other systems, cover bonds and others that have been able to produce longer-term finance. and the ability to know what your obligation is going to be over time makes housing and more stable investment for individuals and available to more people. do you think a more -- as you recommend the gse are somewhat of a wound in that market resumes is managed largely by the private sector that we will be able to obtain a 30 year fixed rate finance and is that a necessary component for sort of american homeowners at?
>> once a helpful list with canada. canada has good home mortgage market without or problems and to our characteristic. one is people actually make down payments. the had ten or 20% down payments and when you go to canada and tell them about all the things that happen in the u.s. to shake their heads because even now fha has what, 3.5% down payment and you can reimburse yourself. yeah, it is financing. so it's good to have downpayments. and if people can't afford a down payment of 5% or 10% we want people to own house is that maybe we are going to far. the second thing is they don't give in a can of the tax deduction for all of the mortgage interests and i am in favor of tax extension or primary residence of to a certain point but we give the tax deduction for everything, you get a vacation, home-equity
loan and we say what happens to the personal savings rate in the u.s.? home-equity loans made it negative because people took so much money out. so i think we've gone overboard in encouraging home ownership, and i think that we've really need to sort of realize we are implicitly subsidizing that in a very substantial way while home ownership is a good thing we've gone too far. ..
i'm okay with letting the private market operate. and if the result of that is that in the middle-class and upper-class markets you can only have 15 year mortgages and not dirty, my view is that supermarket tolerates, that's okay because we should not be using government resources to subsidize 500,000-dollar mortgages and 700,000-dollar mortgages. and that's just a strong view. those who doubted the government subsidy i like to see it done as directly as possible and as efficiently as possible. and my concern is when you mix
all these things together, when you're trying to do the low income and high income and having an implicit subsidy will wind up not knowing what exactly is happening. >> i'm losing my microphone. what i think is tricky right now is that people do experience a subsidy and taking away the subsidy when the housing market is very fragile is a timing problem. >> i agree with that. this is probably not the time to do it this year. >> i think we need concrete plans about what we want in the longer term, but not to be implemented in a shocking or unanticipated or an abrupt manner. and i think the goal of housing as a social goal, even a non-economical and using housing subsidies and means to an end is
worth arguing and worth discussing. i tend to concur with your perspective that's upper middle-class and upper-class subsidies probably wouldn't be one of my social wills. but let me also add here, i think the most profound statement you made in your opening statement is the challenge in the book that i think is really most important is this notion that it's the securitization markets that have collapsed and cut off the floor credit much more than the banks. in recount as a society out of the experience of the 30's, where the roosevelt administration, had a very successful finance the banks. the banks for the 22% and what we did is we lurched in and supported the banks. and we supported the 22% in a big way in the portfolio is
architectural challenges the future is how to put a safety debt structure around the incentives of the securitization markets to keep credit flowing into no place is that than in the housing market. >> and i agree it's the irony or anomaly or unfairness that the other -- that the banks became a much smaller part of the market, but that's the ones we bailed out. and in many cases, it was other institutions and other sectors that actually were more important to credit. the question is, we had a charging company come in and say they wanted money from t.a.r.p. and they said listen, in the two biggest trucking companies go down i will be very bad. so we're too big to fail. and when you think about it, it's not as crazy of an argument as you think because the banks are only 22% here at what is it that so special about the banks?
my view is there is a payment processing function of the banks that his special. but that's probably limited to five or six banks. if we were bailing out the banks because we thought they were critical to long generation, why did the administration, neither the bush administration or the obama administration, require the banks to lend more. you think that would've been the logical result. really the answer is complicated in terms of where they work of loss reserves but partly because as we've argued on securitization is what drives loan by up. so you're right to say that in the current market structure we had its more anomalous that i would get is fill out the banks. >> also not surprising that when banks were allowed to co-mingle, traditional banking activities with securities that are produced in their securities portfolios got devastated, but they pulled in their horns on traditional bank lending. so in one way they exacerbated
the other. >> and to put a pin in another topic that's related to this that we would invite you back to be part of other discussions on. we tax about the whole securitization process and housing market interments single-family. but in fact, also one of the lessons of the crisis as we have given an adequate policy focus on training and, affordable housing for those individuals for whom homeownership is not the appropriate result. the mac and we would be in much better shape if it wasn't an all or nothing if we had some subsidies or rental house. >> and there's both a subsidy issue and also in access to credit were over the last few years the housing terms of single-family, they became almost exclusively the source of access to credit to finance affordable multifamily housing. so whatever the redesign of the system is, we need to put access to capital for rental housing to be one of the high-priority goals of the system.
so with that, i would like to now turn to the audience and see if they would like to get into the conversation. lose weight for someone -- my colleague with a microphone will come around. i would like you to identify yourself and you're welcome to make a brief comment, but very brief, please focus on a question and let us know if you think you would like to chat with. we'll start there and then go to barry. >> yes, my name is steve brandt and my question is for a come excuse me a little nervous here. mr. johnson, utah about the social purpose of financial regulation, the great 30,000-foot comment. and in a world that should have oath carrot and stick, i'm
thinking of the social purpose of our economic system it self because the regulators are going to be socially motivated. how about the culture of what they are regulating, being looked at -- i mean, jim wallace just has a new book out and is calling for a national dialogue lederle on what kind of economics do we have. why do we have economics? you know, managing people like dr. deming used to say the purpose of business is to serve people and make money as a result, not to make money whether you're hurting people or helping people. so can you talk about the idea of getting at the culture of not just the regulators, but the culture of the organization be regulated and get them to look at maybe the literally anti-american to make money by hurting people. >> i guess i would go to two places. the first which is kind of humorous. joseph stiglitz was holding a
panel last year and we were talking about the problems of values here and he said rob, how do you get the speculators back on the track? and i said well, they have to discover belief in the afterlife. [laughter] they have to believe that somebody is going to measure them and their something that matters and that they can't escape detection or can't buy their way in. i think that's the highest altitude regulatory -- >> that's the next regulator we have. >> i'd say that you are really talking about a system in the purpose for life and for society. and at some level, not adam smith, because if you read the wealth of nations, he doesn't talk like this. but some of the modern free market fundamentalism has tried to act as this, excuse me, if
you are in the marketplace, you are therefore virtuous. and i think that's an oversimplification that people like jim wallis has to challenge now. and probably no better place. he's a theologian so no better place than making religious and moral teachings from his work in places like theological seminary. i know kerry dorian has written a brilliant book called soul in society and i think examining the social movement of the early 20th century and their sense of social purpose can help us have a conversation on values. how you put that against what you might call the hubris of money and particularly large, large kind of money that sports stars and financiers make. i think were going to have to talk about sociobiology and
bring psychologist at the table, too. >> we at cap that time talking about the origin of the progressive movement. in the very part early of the century and there's also a similar discussion about what the purpose of many of our social and additions were and they look empirically at beginning to imply information and evidence to understand what role they played in changing people's lives and i think there's much in that progressive tradition that can help inform us and begin to think about some of these questions. all right. so next we have bear at country in theory and 99. >> eikenberry's the guest with the american federation bank. i'm going to take us down quite a far ways here from the last comment. the idea that sort of coming up very quickly with a bullet if you will and this was enough is to restore glass-steagall and i was intrigued into one of you address that.
can you talk about glass-steagall and that will make or might not have played. >> actually, i've looked at this pretty closely and i know there are people that have what i've come to see a sort of a nostalgic view of aging. and i'm afraid i have to come out with a conclusion that it does not make a lot of sense to reinstate glass-steagall and not for three reasons. one is if we look at the evidence, glass-steagall, to maintain it did was allow banks to get involved with securities underwriting. and there were 25 banks that were put into receivership in 2008 and none of them were significant players in the securities underwriting. and then you look at a bank like citigroup and he was involved in the securities underwriting, but if the securities underwriting was a problem, then we should its feet in their portfolios the dregs of the underwriting that they couldn't sell. instead what we see as the aaa
mortgage-backed securities that they kept and then they went out and bought more. and so unfortunately it's a much more fundamental problem that they always good by aaa security and the about ones which were poorly done and i guess they believe their own models. the second thing is, what we've learned over the last two years is that the most fragile institution, financial institutions is a large financial institution that is not a bank because banks have two big advantages in terms of stability. i have access to the fed borrowing window and second of all more importantly they have stable retail deposits. and when you look at lehman and you look at bear stearns, what you saw is the only short-term financing they have are very sophisticated lenders, institutional investors funding the short term and those guys pull the plug very soon.
so ironically, if we were to tell citigroup now, you can do securities underwriting. we put that in a separate entity. that would be the entity that would be the one most likely to go wonder. and if it's big unfortunately until we get a new theory of too big to fail we probably bail it out. the third thing is, glass-steagall never applied outside of the united states and in a global market now you just know that would only take a new york second before people would figure out how to do this in france and germany and all these other places. so my solution is twofold. one is let's not approve mergers allowing people to get bigger and we surely have done a lot of that. and second of all, if we think that certain activities of banks are really risky, we ought to have very high capital requirements for those activities. and then people can decide whether to do them or not. unfortunately, i think the day is past when we can bring back a glass-steagall.
>> i will strongly say compartmentalization is the essential last eagle is nostalgia. first of all, at the prodding of thomas ferguson, the scientists an economic historian when i worked for the senate bank, used to go through the hearings from this era. glass-steagall wasn't great public policy. it was designed to cut jpmorgan & co. in half and that was industrial combat, where other banks were looking to break jp morgan apart. the more substantively, i think there are few reasons to deter and allies. one is when there are conflicts across departments. proprietary trading confirmations into compartmentalizing to diminish conflicts of interest and not lie on this kind of vague motions of chinese walls is worth a consideration. and the second is that which you have under the safety net like
deposit insurance, fdic guaranteed bonds, shouldn't be used to subsidize some activities on the asset side, like proprietary trading in derivatives market making in the otc area. so i would link what we need to do in this architectural exercise is consider what is outside of the safety net, what kind of things can be subsidized and it's a very tricky problem because if you just say for the risky staff outside of the safety net and it doesn't protect the real economy anymore. but this notion that there are no paul volker has been saying i'm not nostalgic about reinstating glass-steagall, similar to the mccain bill but i am interested in tobacco marginalization. turning large ones like you managed turning them back into
public utilities where they're serving the economy and serving society. >> hi, dana, one more in the back and then we will have to close this down. >> thanks to both of you. and a question to both of you and thanks to the center for holding this important for them. my apologies not to be at the 30,000-foot mark and i guess without getting into the weeds either. but somewhere in the middle ground, stipulating that you were both -- that we agree there is some very serious flaws to the current american financial regulatory system, that they need to be addressed and that we are suffering as a result of these flaws. but also that the senate is battle weary, has been dealing with health care, that its agenda is full of high
priorities, that this set of issues is very complex. and that the force is on behalf of the status quo are strong, how do you make the argument, what do you say to the senate, that the time is now to address this, to address this in a serious way and a comprehensive way? what you say? banks. >> want me to start? >> sure. >> next november, people are going to relieve you of your job. last night there isn't anybody in the united dates who doesn't think we need financial reform. now the question is there are ways. could we have cosmetic financial reform pretending to address the job and not do so. i think that's a very high likelihood unfortunately because of those powers you mentioned. but almost everybody, when you
talk to a senator, i'm not talking about in a public forum, but when you talk to the house, they know that something's rotten in this process and they know that there is real major repairs that are needed. so i don't think you have to condition that we need it. you have to help them see how with pressures other than lobbying campaign money to get the needed reforms. >> and i just want to add, i think that senator dodd's decision not to gun is actually helpful for this process. before that i think he was extremely sensitive to how everything he did play it in terms of a public image. that's actually not particularly helpful to a legislative process. i think this is sort of like his swan song. he is a chance now to make it happen and i think he wants to make it happen and he doesn't have to worry that somebody in
connecticut is going to second-guess in sharpshooting them on every issue. so i think actually that's a very positive development, which should happen and if i had to predict, i think exactly this summer it will pass but maybe in september. >> all right. we had one last question. i can't unfortunately see. two rows back behind the last question there. >> al's walked in and just a question of what you open with about talking about structured finance and the need to restart it. what do both of you suggest as the strategy to get structured finance to come in and play something similar to the role that was playing two years ago? >> well, there are three points that need to happen. one is everybody needs to have
skin in the game and that's in the house bill. we can't have the originators telling to the secondary market with no risk of loss because they don't have the right incentives to do the due diligence. second of all, we have is terribly complex structure off-balance sheet where you see this in the investor committee. you need simple transparent structures in which people really know what's happening. people don't want to buy this stuff because you had second, third, fourth tier cd out squared, cbo to the third or a cute and so we need simple structure is much better disclosures the sec can do about more on that. the third thing is, you know, a lot of investors depend on credit rating agencies and basically we have a forum shopping problem. as long as we have bond issuers choosing a credit rating agencies, investors don't have confidence in that. there've been a lot of proposals for more disclosure, et cetera
but mine is very simple. at the sec appoint an independent person for a day to represent investors and pick the credit rating agency and then let the market work. but as long as we have the bond issuer picking the credit rating agency and those structured finance, those deals are worth four or $500,000 each for the credit rating agencies. i don't think investors are really going to have confidence. and in the end, that the key. investors don't want to buy this stuff because they can't understand it and they don't have confidence in the credit rating agencies. so you have to do all those three things. it's not a simple answer. >> well, we covered an enormous range of theology and very detailed philosophy across a wide range of issues today. let me encourage you to pick up the book, to go to the new institute for new economic thinking and of course to the senate for american progress
>> were at this years cpac conference talking with jane hampton cook about her new book. please tell us about "battlefields & blessings." >> this is a story that they've encouraged from the war in iraq and afghanistan and my co-authors and i interviewed 60 or so men and women from the military to really get their first-hand account and their experiences in iraq and afghanistan. and the book is formatted into 365 stories. you can read them one every day if you want and really just get a really good clans on how people have lived loudly for liberty on our behalf in iraq and afghanistan. he might tell us about -- i'm sorry, have you been to cpac before? >> yes, i have been to cpac
before. it's a great place to talk about the founding of our nation and also talk about what people are doing today for the cause of liberty and freedom. >> it seems like your books run in kind of a series, or do they follow a pattern? >> yes, the series is called "battlefields & blessings" and there are four books in the series. there's one on the revolution was as one of my titles. one of the civil war, world war ii, iraq and afghanistan and in vietnam i think is in process and some others. so it's very much a rich theory to gather how people stood firm for freedom and displayed courage through out the generation and there so many similarities. times change, but a lot of things don't change. courage is one of those things and faith as well. >> how did you get started doing this series? >> well, my publisher wanted to
do the series and i really wanted to get started on our country and then the revolution. we had to do iraq and afghanistan. it was something i came to me and something i could put a lot of passion and energy into. and for this book we interviewed so many people. and just to get a variety of strengths of men and women into really get a good deep respect to and a far-reaching perspective on some of those, you know, brought experiences that people have died in iraq and in afghanistan and how they have triumphed in that state to tremendous adversity. >> to write for other venues or do you have a blog? >> i have a website, jane cook.com. i have a book on the first ladies and so kind of a good mixture of good american folks throughout the generation. >> thank you very much.